Welcome to the 14th Annual Laguna Conference. For important disclosures, please see the Morgan Stanley Research Disclosures website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. I am Toby Okwara. I am part of the Morgan Stanley Multi-Industry Research team. Happy to have Rockwell Automation here, Blake Moret, CEO, and Tessa Myers with Intelligent Devices. Thank you guys for being here. Starting off, just looking generally with some of the longer-term trends impacting the company, how have customer conversations changed now compared to last year with some of the progress around reshoring and investments in manufacturing?
I think the tone is generally optimistic. To be sure, there is a lot of tailwind. There is a lot of headwinds, and I am sure we will talk about inflation and tariffs and so on. But the underlying tone from our customers is distinctly positive. Our home market, North America, is the best place to be investing now. To be sure, we are enjoying some of the growth from data center. But in our traditional served end markets as well, we are seeing a generally positive demeanor. Within each of those industries, there is end market-specific activities going on as well. As we move across discrete, hybrid, and process end markets.
In discrete, we saw low double-digit growth the last quarter from Automotive, which is about 10% of our total business. We are still not seeing a wholesale release of CapEx, but we are seeing some major projects here and there. We are certainly seeing a lot of modernization. Discrete is where Data Center is found, e-commerce, warehouse automation. The parcel handling companies are spending a lot of money to get the right balance between labor and technology. In hybrid, Food and Beverage, we are seeing decent growth, again, primarily centered around modernizations. Home and Personal Care, high single-digit growth in the last quarter. Life Sciences, about 10% growth in Q3. That is one of the areas that we are seeing some early examples of reshoring, or shoring, as I like to call it. Energy markets.
When oil prices are high, when oil prices are low, efficiency is still an important part of the agenda for the oil and gas companies. Mining and Chemical, I think, show some signs of progress. Tessa?
Yeah. I think across the board, we're seeing good progress across industries, and operational efficiency and driving productivity in plants is always a top priority for the customers that we serve, and that drives demand for the products and services that we have.
As you think about that operational efficiency perspective, how have some of the labor constraints and broader inflation in the market affected the conversations and the prioritization of these automation investments?
Yeah, I think about a year ago, there were some conversations we heard from two different types of industrial companies, one in Automotive and another one in Parcel Handling, where they had gotten through discussions with their labor unions, and they immediately went to a place of how can we get additional automation, again, to strike the right balance there? So at 4.1%, 4.2% unemployment, a lot of key jobs in manufacturing are going unfilled, and so having the right amount of technology for the scarce resources that these manufacturers do have is really important to give them the superpowers to get as much productivity as possible per person who is working in these facilities. That's been a consistent theme across really all of our served markets. I think in Data Center, just to go there for a minute, time to value is so important. Modularity.
These things are looking like factories, as people have said, and so our technology is being increasingly adopted there, and we're seeing some nice wins in an industry that previously was not as big a contributor.
I think a lot of the conversation is centered around modernization investments, but when we're thinking about the broader theme, it has been more so centered on greenfields and bigger project activity. What do you see as the main catalyst that would really unlock that larger project activity going forwards?
Yeah, I think a reduction in the uncertainty. As there is a lot of active headline-grabbing trade discussions going on. I was in Washington yesterday, and it is a very active moment, certainly for the U.S.'s most important trading partners here with Canada and Mexico. A reduction in the volatility there, particularly in industries like Automotive, where the supply chains are so integrated across those three countries, I think that would release more capital.
Is there any data point or anything particular you track to keep a sense on the broader momentum in the market?
We are most highly correlated over time to industrial production. We certainly look at the PMI rates, and those have been positive for a while now, over 50. But industrial production is what Rockwell's business traditionally has been most highly correlated to. I certainly look at that. I look at unemployment, because I think with such low unemployment in our home market, demand remains intact. A little bit harder to quantify, but progress of, let us say, USMCA 232, Section 232s are in some ways even more important right now. But watching the progress of that, those are some of the things I am looking at particularly.
To that policy perspective, we've seen different government initiatives, whether it be tariffs or OBBBA. How have these initiatives impacted the conversations and demand around reshoring, and what policy do you think you'd want to see that could further spur it?
I'd like to see us take a pragmatic approach with the targeted application of tariffs, not the wholesale, one-size-fits-all type of approach. Let's focus on the main issues, which is non-market behavior by non-market economies that are doing disruptive things with overcapacity, but not a broad-based approach that hurts friend and foe alike, as well as U.S. manufacturers, for whom they have a very hard time finding domestic sources of critical inputs. If the main prize is to increase the amount of final assembly in the U.S., providing a clearer path for being able to get relief on inputs that are important for that final assembly, I think is an important area of focus for policymakers.
I guess as you look at some of the movements in demand more recently and how customers have reacted to tariffs, how do you parse out shorter-term investments to mitigate tariffs versus investments that will build towards that longer-term strategy of capacity?
Yeah, I think people are still getting on with their strategy, and I look at Rockwell's own behavior. We announced not too long ago a major new plant that'll be very close to our headquarters in Wisconsin. While we won't see the first products coming out of that plant until 2028, we're taking a long view to what can unlock the next level of customer service and margin expansion there. Tariffs currently aren't helpful, but that shouldn't cause us to put an indefinite pause on the execution of things that are going to increase market share and expand margins. I think a lot of customers looking like it, looking at their own strategy and their own roadmap in that way.
And then as we dig into the verticals more, Rockwell's exposure is typically aligned more so with what the U.S. traditionally produces, a lot of exposure to food and beverage, for example. But when you look at the markets more prone to reshoring conversations, whether it be semis, pharma, battery, how transferable are Rockwell's products and solutions to those markets that have more often been produced overseas?
Yeah. I think there's a nice mix as we track new capacity projects. So major new capacity, whether it's reshoring or shoring, or in some cases, it's growing, like in case of Data Center, where it's not moving from any other place, it's just there's a much greater demand here. I see a nice mix between industries that were traditionally not as associated with Rockwell and industries that have been in our wheelhouse for a long time. So Semiconductor and new fabs, we haven't talked as much about it in North America, but that's been one of the top one or two industries in Asia for us for a very long time, the facilities management and control systems. There are semiconductor facilities here in the U.S. You used to have one in your territory that was one of the largest Logix installations in the world.
We're not a stranger to that. Then some of our new offerings, some of the work we're doing with the chiller OEMs, for instance. I've talked before about what we're doing with Texas Instruments in one of their fabs to optimize their chillers using AI wafer transport with Independent Cart Technology. So some capabilities that we have now that we didn't have 10 or 15 years ago, I think, are helpful. Data Center, we can talk about the ways that we are penetrating the data center opportunities in a minute. Then we talk about Life Sciences with a lot of opportunities spanning software and digital services and hardware. So there's a nice mix there.
Yeah, and I would say we have a global approach to working with customers and a long history of working with customers globally and supporting them as they make investments in other regions of the world, and particularly in the U.S. And I think that's one of the benefits of our architecture and our product portfolio is that it does apply to a lot of industry verticals and applications. So the investment that we make in that technology, how we integrate it together, can be leveraged across a lot of industry verticals.
I think if I can add one thing. Even though we are not talking a lot about reshoring for food and beverage companies, because candy bars and beer have never traveled really well across the ocean. You generally want to produce those things close to the consumer market. A really important part of Food and Beverage and Home and Personal Care and Pharmaceuticals is the end-of-line packaging, when you put it in a bag or a box or a pill bottle. And those OEMs, those machine builders, many of which are based in Europe, all have some capacity in North America, which with all the tariffs and the focus on North America as a growth market, they are all looking at increasing that. The battle, of course, is are they going to be using more of their European standard or are they going to be using more Rockwell?
They all have experience with Rockwell. What we are seeing is that, especially with a lot of the new products that we are coming out with, we are winning more than our fair share as those machine builders are increasing their presence in North America. Many times it is for commercial reasons, because if they are competing at a big food, U.S.-based Food or Beverage or Home and Personal Care end user, they would prefer that we were working with them and not competing with them if they had made it clear that they were not going to use Rockwell. So they would rather have a friend and an ally as they try to sell their machines against their worldwide competitors than competing against us as well.
We have to have a competitive product at the right price, but I think, and you have been a part of a lot of those discussions, both here in the U.S. as well as in Europe, but I think we are making some great progress there.
To that point on winning your fair share, there has been conversation in the past of concerns that Rockwell may be losing share in the market. How are you guys able to differentiate and how would you assess your competitive positioning?
Well, we look at it in a variety of ways. We certainly look at the market share reports. While those are lagging indicators, recently released reports look good and give us a lot of confidence in our comments that we are taking modest share in some really important places. We look at head-to-head marquee battles where we are competing with our major competitors, and making sure that we are seeing that the combination of our new offerings, as well as our ability to have the right price, our support, our engineering, when that is a part of the project. Those are all part, the responsiveness of the organization, how I and my team are ready to jump into a battle at the point of attack when there is an opportunity to win. Those are all things that we have tried to instill as a fundamental part of the culture, making faster decisions, better empowerment.
Now, to some of the foundational pieces, I do not think our portfolio has ever been in better shape than it is. When I look at software and control and the build-out of our software-defined automation, that is not just a virtual PLC. We have that, and we will be showing it to you at Automation Fair in Boston in November. But it is a system-wide approach, so it includes the simulation tools, it includes the agents, it includes FactoryTalk Optix at the edge, and then we have a lot of new products coming out of Intelligent Devices as well.
We have had a number of really positive new product introductions where we are growing beyond our expectations in those areas, and what is really positive about that is we are not just seeing wins with existing customers. We are seeing wins with new customers, gaining new share and new customer conversions as a part of those new product launches. I think the combination of the technology that we have built, things that we have added over the last few years through acquisition, have brought together a really nice overall system architecture capability that is really resonating with customers.
As we share with them, and what you will see at Investor Day at Automation Fair in November, the progress that we are making in innovation around how we bring that architecture together, how we help customers orchestrate the resources and the production processes in their plans, and how we are applying artificial intelligence as an assist and a value -add to the systems that our customers have. We are getting really positive feedback from the market.
With these new innovations coming to market, how does that kind of augment your content opportunity? Is there any kind of rule of thumb or sense you get for every unit of CapEx, this is what Rockwell Automation has the right to win?
Yeah. At the highest level, while it would make everybody's job easier that if we could apply a percentage to CapEx, 1%, 0.5% , 2%, it is still too variable by individual industry. If CapEx is being deployed in a new automobile assembly line, for instance, within the existing building envelope, that percentage of automation or Rockwell content is going to be significantly higher than if somebody announces a $10 billion wafer fab, where it is going to be a fraction of 1% in terms of our content as a part of that. So there is a mix across those.
Now, the other piece of it, and this is a part of our growth algorithm where we talk about all in 6%-9% top-line target CAGR through the cycle, 3%-5% of that being market growth, including price, 1%-2% expanding markets and share growth, expanding markets in things like mobile robots, in terms of FactoryTalk Optix, in terms of some of the digital twin creation that we have capabilities for that were not a very large market. Rockwell had low participation in it. Process, for some of you who remember, we talked for a long time about process being our biggest growth opportunity. Process is all in 40% of Rockwell's total business, with discrete being about 25%.
I really like the even balance that we have across end markets, and I think that has been helped in some part by some of the new offerings that we have as well.
As you think about expansion into new markets and with these innovations, what products in particular or solutions are you most excited about, and what has resonated best with customers, and how does that unlock value for your customers?
Yeah. I'm going to throw that to Tessa first, then I'll make some comments.
Yeah, look, I think we're focused on as we expand the product portfolio and we add new features, there's a few technology enablers that we think are really supportive of the work that we're doing. Certainly, software-defined automation, software-defined architecture is a big area of focus for the organization. As Blake said earlier, that's not just about a virtual PLC that you can run on different types of hardware. It's really taking this approach of all content, all products, all technologies within the architecture from that software-defined. It makes it easier to design and engineer. It makes it easier to deploy. You can validate it before you put it into production, and you can more easily lifecycle management. So our customers see a significant benefit across the lifecycle of the system because of that.
Artificial intelligence is certainly a technology enabler that we're focused on, and that's not just a standalone AI product. That's how we bring that to all aspects of the architecture. So artificial intelligence, agents in our design environment so that it helps engineers more easily design, emulate, and simulate a system, and speed their time to deploy. That's AI applied in our software applications that help our customers more easily build and optimize production schedule to identify issues that are happening in operations and improve. Then certainly in maintenance. From a predictive maintenance perspective, monitoring the equipment that's installed and identifying anomalies or fixes that customers can apply before they have an issue. So AI is certainly a driver.
We think robotics is a big area of technology interest, and certainly the acquisition of OTTO Motors and Clearpath Robotics was an important step forward for us from a robotics perspective because a big area of labor intensity and cost is material moving through a plant. Intelligent material movement solutions is a big area of investment and focus around driving cost and productivity in an operation.
Yeah. If you think about some of the big themes that we have talked about, software-defined automation, our offerings in the physical AI area with robotics, with motion control, some of these areas, then the overall orchestration of a plant environment being able to orchestrate the fixed automation that has been Rockwell's foundation for a long time, the mobility, including robots, for instance, all types of robots, then weaving people through a connected worker stream and bringing all that together, Rockwell has got a great head start in those areas. We have a great MES offering. We have fleet management with our mobile robots that can be extended to other types of robots, including humanoids, and a connected worker offering with Plex and some of our other software. Then software-defined automation, we have talked a lot about that, and physical AI. Tessa just touched on some of our offerings there.
We are moving at pace in all of these areas, and importantly, bringing that together with our offerings, but also the ability to interface with others is something that I think we are second to none.
As we look at just generally movements with productivity and efficiency, how do you see opportunities to sell that in your own operations?
Yeah. Tessa can talk in a minute about what she's doing specifically in Intelligent Devices, but look, we are absolutely committed to continuing the path that we've been on for the last couple of years in terms of expanding margins going to and through historic levels. That's in product-specific businesses with new product introduction, products that can do more for a lower cost, direct material negotiations, preferred products, pricing, and there's lots more that can be done with pricing. The intelligent use of reusable IP to increase the margins in our people-intensive businesses. Of course, the progression of OROS and our LifecycleIQ Services business is probably the best example, where we've roughly doubled the profitability of that business in a relatively short period of time. We're not done.
We've gone through a lot of the early tactics that Christian and I and others have talked a lot about. But the investments in roughly $2 billion in plants and talent and digital infrastructure have, as a large part of their objective, the continued expansion and kind of that next tier of margin increases as well as improved customer service. Maybe a little bit about what we're doing specifically in Intelligent Devices.
In Intelligent Devices.
Yeah.
We're really focused on a systematic approach, a continuous improvement, and the team has really embraced that. In Intelligent Devices, expanding margins, certainly volume, we want to continue to grow the business as we move forward. Direct material costs, so a big portion of the cost for the business is the raw materials that we get from our suppliers. So that's a combination of commercial negotiations, product redesign, identifying alternative components, and so direct material is a big piece. Manufacturing efficiency, so the investments that we're making in increased automation in our own plants and new ways of working in our plants and driving manufacturing efficiency is important. Logistics, ensuring that we've got the right logistics network and processes can certainly drive some efficiency as well.
How has experience during prior up cycles kind of informed your strategy as demand starts to pick back up now?
Well, first of all, I don't think that we can slot our current moment in time as fitting neatly into a prior cycle, in that we talk about in the past, it was perceived that we would see really strong performance with early cycle industries and applications. Automobile, Packaging, were typically more product-intensive early cycle businesses, followed a couple of quarters later by exposure to growth in process, Energy and Mining and so on. There's too many, I don't know, idiosyncratic or special things that are going on right now.
You look at in the Automobile segment, the shift back to hybrid and internal combustion engine-powered vehicles is kind of an unusual once-in-a-generation type of shift as people building cars are saying, "We're going to build what customers want." Yeah, there's still going to be a market for EV, but if people want to buy hybrid or gasoline-powered vehicles, then that's what we're going to build. We're seeing that driving some of the model changes. With energy, with the kinetic conflicts around the world, that's put an extra element into the traditional investment cycles of energy markets, Life Sciences, GLP-1. There's a few of these things that I think make it hard to characterize this particular point in the curve. Now, what's Rockwell doing? Well, first of all, I like that we have broadened and balanced our exposure across discrete and hybrid and process end markets.
I like that we're getting good growth from Data Center, but it was only two of the 10 points of organic growth that we saw, year-over-year organic growth that we saw last quarter, and I think that's a nice place to be. It speaks well to our ability to grow without Data Center as well. We love the Data Center growth, but I like having other cards. I think that, I think adding the new ways to win, in some cases with technologies that our competitors don't even have.
It's not just having the best PLC, it's having a mobile robot that none of our major competitors have, and the ability to knit those different disciplines together, the software, the information management, the really effective use of agentic AI, all of these things, I think, will give us an ability to decrease the trough in a traditional cycle and to be able to make sure that we've got a more consistent, higher upside. That's on revenue. If I can talk for just a minute about the margin side of things. Look, we had a significant amount of reduction in force in 2024 and early 2025. We're still down almost 10% in terms of headcount across the company from our peak in early 2024.
We are committed to making sure that as we add new resources, it is with a lot of discipline, being able to be efficient and thoughtful, making full use of artificial intelligence tools within the organization so that that gives us an additional tailwind as we put all of these other margin expansion plays into practice. That is something that has informed us, that it's a consistent investment. We continue to be committed to the percentage investment in engineering and development that we've talked about. But it is making sure that we don't go back to a place where we found that we added too quickly and that we have to strip that away. It's using that crisis that we saw a couple of years ago and that base as a way to grow more profitably than ever before.
I think our conversion on incremental revenue is a testament to that, and we have every intention of continuing those high levels of conversion.
I think we're getting down to a few minutes left. I wanted to leave time for any questions from the crowd.
Thank you. Could I just ask about semiconductors? When you think about how you purchase semiconductors, how long are your contracts, and to what extent are we actually seeing the full sort of spot prices already reflected in your cost base? How long will it actually take, given how those contracts are structured to see that fully reflected in your numbers? Is that something we should be concerned about, or do you think you can price up accordingly?
No, I think we can stay ahead of it in terms of price. We do have a certain amount of long-term supply agreements with the semiconductor suppliers, but we are not counting on any near-term moderation of the pace of increases, particularly in memory. That is really the crux of it. We did a nice job of buying ahead. In our inventory, we have a number of tranches of different costed components, more frequent price increases, price increases that are expected to keep up with that cost and preserve the margin with respect to those inflationary drivers. We feel comfortable with that, and we are not looking or basing our plans on a hope or expectation that that moderates anytime soon. Importantly, we are not seeing that affect availability of the memory.
Compared to the data center demand, we and our peers are relatively small consumers of this, and we are still getting the supply that we need, albeit at a very inflationary price.
Blake, if I could add, I think one of the biggest lessons coming out of the supply chain crisis was the processes and the agility for the organization to also respond. Whether it is availability or it is cost, we have an ability to evaluate alternates, design in alternate vendors. It is a combination of managing existing vendor relationships, having that agility and the resiliency to move as well, and then leveraging price in the market. I think we feel good about our capabilities across all of that.
Yeah. The task for our development engineers hasn't gotten easier. Besides creating new products, they're constantly trying to do product cost reductions. They're looking at resiliency and shifting suppliers from high-risk areas to other areas. When we have new disturbances or disruptions to the system, like inflation due to data center demand, they factor that in as another thread that has to ultimately be synthesized into a single effort. I think they've done it in an engineering-like way, being able to weight those varying things. Over the last few years, we recognize that there is a certain baseline of continuation engineering that is just going to be a part of our operations for the foreseeable future.
I think we're at time, but thank you again for being here.
Thank you.
We really appreciate it.
Yeah. Thanks, everybody.
Thank you.